The Chamber of Commerce’s Employment Regulation Index

The Chamber of Commerce, as part of a national and state campaign to overturn government regulations, recently released a report claiming that state employment policies hinder job growth (see The Impact of State Employment Policies on Job Growth. A recent Economic Policy Institute analysis has shown that the Chamber’s study is poorly constructed and grossly misleading (see Why Do Some States Have Higher Unemployment Rates?). The Chamber’s regression model fails to meet the most basic tests of rigor expected of any serious research report. In fact, the recent EPI analysis showed that the Chamber’s methodology actually better supports the conclusion that strictly enforced legislation against wage cheating or unjust dismissal and in favor of improved paid family leave and advance notice of mass layoffs is desirable because it leads to higher state per capita income.

But the shortcomings in the Chamber’s methodology don’t end with its faulty regression analysis. A closer look at the components that make up the Employment Regulation Index (ERI) that the Chamber constructed further demonstrates the basic failings in its analysis. Even just a little scrutiny makes clear that the Chamber’s ERI shouldn’t be used to shape state employment policy

The Chamber lists 34 employment laws, policies, and conditions that in reality protect employees from various kinds of abuse and mistreatment—everything from workplace safety standards to requirements that employers pay separating employees (i.e., employees who are leaving a firm) for their accrued vacation leave. The Chamber then constructs its ERI by assigning a score to each state’s laws and policies, with a high score showing strict regulation and a low score reflecting lax regulation.

The Chamber presents little or no research evidence that any of these laws should be expected to thwart job creation. The evidence that it does present is largely misreported, ignores more recent research that disproves or casts doubt on its assertions, or simply contradicts the Chamber’s own claims. It is no surprise, therefore, that its regression analysis is invalid. As they say in computer science: “garbage in equals garbage out.”

A brief review illustrates some of the pervasive problems with the Chamber’s research and its Employment Regulation Index.

State-level WARN acts

The very first of the Chamber’s issue analyses—of state “mini-WARN Acts”—is typical of the flaws rife throughout its report. When the U.S. Congress enacted the Worker Adjustment and Retraining Notification Act (WARN Act) in 1988, the U.S. Chamber of Commerce predicted devastating job losses and great harm to the economy. Ten years later, the U.S. economy was a job creation machine that the rest of the world envied, with unemployment falling rapidly (to an eventual low of 3.9%) and inflation completely tamed. The Chamber never admitted it was wrong, and its new report perpetuates its error.

The WARN Act simply requires businesses to give 60 days advance notice when they intend to close a facility or permanently lay off large numbers of employees. The ERI ranks states according to whether they have their own versions of the WARN Act and require businesses to give advance notice to more employees than the federal law would.

Despite its claims that there is an extensive literature examining the impact of such laws, the Chamber cites only a single study (Ehrenberg and Jakubson 1988) about advance notice provisions, written before the federal WARN Act became law. Why this study is even referenced is inexplicable because it actually contradicts the Chamber’s own position, concluding that plant closing notification laws have no negative consequences:

Although opponents of advance notice cite potential costs of such policies, empirical studies have found no evidence that advance notice causes firms’ most productive workers to leave and that the productivity of the remaining workers suffers. Moreover, save for Lazear (1987), which we have criticized above, no systematic empirical evidence has been provided on the other potential adverse effects of advance notice that opponents have enumerated.

Employment-at-Will

The second set of state laws the Chamber includes in its index involve the “employment-at-will” doctrine—the rule derived from the common law’s Master-Servant treatment of the employment relationship (still followed in some states) in which an employer can fire a worker for any reason, or even no reason at all. The report assumes that the fewer exceptions there are to the employment-at-will doctrine, such as rules that employees can’t be fired for blowing the whistle on polluters or tax cheats, the more job creation a state will have.

The only research evidence the report cites is work by Autor, Donohue, and Schwab (2002). They identify three types of exceptions to employment-at-will: (1) a ”public policy” exception whereby employers are prohibited from firing workers for activities in support of public policy, such as jury duty or whistleblowing; (2) a “good faith” exception whereby employers are prohibited from firing workers to avoid scheduled payments such as year-end bonuses and commissions; and (3) an “implied contract” exception whereby the representations of employers in employee manuals and other letters are interpreted as promises to fire a worker only for good cause.

According to the Chamber, the Autor et al. study “find[s] that the implied contract exception is the primary cause of employment reductions.” This is a misstatement of the research, which found a modest effect only from the implied contract exception (Autor et al. p. 29). The authors found “no robust employment or wage effects of two other widely recognized wrongful-discharge laws: the public-policy and good-faith exceptions.”

In other words, the Autor et al. study directly contradicts the research evidence the Chamber invokes to rank the states based on how many exceptions they have to the employment-at-will doctrine. There is no evidence that most of the exceptions have any effect on job creation.

Living Wage Laws

The Chamber is at its most creative when it invents a score for states that have living wage laws or that permit municipalities to have them. Even if a state and its municipalities do not have a living wage law, the Chamber’s ERI still penalizes it in its scoring if it hasn’t taken the extra step of explicitly prohibiting its municipalities from enacting such a law. It is an understatement to say that there is no research evidence to support this scoring.

Minimum Wage Laws

The Chamber’s treatment of state minimum wage laws is another egregious example of mischaracterizing the research evidence. The report correctly states that the long-held view that higher minimum wages cause unemployment “was challenged by a series of papers in the 1990s.” The actual, real world experience with federal and state minimum wage increases convinced hundreds of economists that modest minimum wage increases have no adverse employment effects (see, for example, this statement). The Chamber’s report, however, mischaracterizes the current state of research, suggesting that recent evidence “has reaffirmed the traditional view.” In fact, recent evidence, including a series of rigorous studies by the Institute for Research on Labor and Employment at the Universit
y of California, Berkeley, strengthens the modern view that minimum wage increases—including at the state level—typically have no effect on employment.

The Institute’s Minimum Wage Effects Across State Borders compared all neighboring counties in the United States located on different sides of a state border with different minimum wage levels between 1990 and 2006 and found no adverse employment effects from higher state minimum wages. The Institute’s Spacial Heterogeneity and Minimum Wages: Employment Estimates for Teens Using Cross-State Commuting Zones found “no discernable disemployment effect, even when minimum wage increases lead to relatively large wage changes.” Finally, the Institute’s report, Do Minimum Wages Really Reduce Teen Employment?, found no reduction in teen employment when it analyzed the 1990-2009 period and carefully controlled for more factors than previous minimum wage studies.

Simply put, the research evidence does not support the Chamber’s assumption that higher minimum wages are bad for job creation.

Workers Compensation Benefits

It is hard to see any connection between job creation and the ratio of workers’ compensation benefits (i.e., payments by insurers to employees disabled on the job) to covered wages in a state. The Chamber even admits that “this metric is not related to a direct impact on employers.” Moreover, a more relevant metric—workers’ compensation premium rates—is also included in the index, so even if the benefits-to-wages ratio were appropriate, the Chamber would be double counting. Nevertheless, the ERI ranks the states according to this ratio and gives the lowest score to the state with the lowest ratio. The Chamber’s report claims that the inclusion of this metric is called for “by the economics literature,” but it cites no research paper and presents no evidence that this workers comp ratio has anything to do with job creation.

Employment Notices in the Workplace

The most absurd treatment of any issue in the ERI is probably the ranking of states according to how many employment notices they require employers to post in a workplace. The Chamber presents no evidence that notice posting has any impact whatsoever on job creation, and any measurable impact from the tiny cost of notice posting is implausible.

Paying Accrued Vacation

A close second in absurdity is the Chamber’s treatment of laws requiring employers to pay accrued vacation to separating employees. Denying employees protection when an employer fails to pay them for the vacation leave they earned is not a job creation device.

Right-to-Work Laws

Finally, the notion that misleadingly named “right-to–work” laws, which make it harder for unions to collect dues from the employees they represent, are good for job creation has been debunked by a series of reports published by the Economic Policy Institute in the past month. These laws have been shown to reduce wages and benefit coverage and to reduce unionization. The research that purports to show that right-to-work laws have an impact on job creation has been revealed to be seriously flawed (see, for example, Does Right to Work’ Create Jobs? Answers From Oklahomaand The Compensation Penalty of ‘Right-to-Work’ Laws).

Given the weakness of its supporting research, it is no surprise that the Chamber’s ERI is not a valid predictor of a state’s job creation or employment growth. The elements from which the index was constructed have little or nothing to do with employment trends, but a great deal to do with whether employees are protected from employers that would cheat them of overtime pay, deny them sick leave, or trample their rights of free association and freedom from discrimination.

Rather than an objective guide to job creation policy for the states, the Chamber’s report and the ERI upon which it relies are nothing more than the Chamber’s wish list for doing away with labor standards and sensible safeguards.

Autor, David H., John J. Donohue III, and Stewart J. Schwab. 2002. The Costs of Wrongful-Discharge Laws. Working Paper 9425. Cambridge, Mass.: National Bureau of Economic Research <http://www.nber.org/papers/w9425>